The Fed raises rates, but faces a dilemma

Why are unemployment and inflation falling at the same time? What is the impact on monetary policy? AllianceBernstein suggested the following possible explanations: The job market is not as strong as thought: Low unemployment may exaggerate how strong the job market is. There may still be some workers on the market who could still return to the job market at some point, meaning companies don’t have to raise wages enough to keep inflation up. The fact that the underemployment rate (the proportion of part-time workers expecting to have full-time jobs) is still higher than the pre-crisis level can illustrate this phenomenon. Temporary Inflation Impact: Some temporary factors may put downward pressure on the inflation rate. For example, the telecom industry has recently promoted the all-you-can-eat plan for mobile phones, which has lowered the price increase of communication services in the past three months.

 

Less-than-expected economic growth:

The U.S. economy grew less Qatar Phone Number than expected in the first quarter and may have contributed to the weaker inflation rate. Enterprises may take price reduction measures when sales performance is not as good as expected, especially for department stores facing fierce competition from e-commerce. Weakening of the relationship between economic growth and inflation: The relationship between economic growth and inflation may not be as strong as it used to be, and this explanation is what worries the Fed the most. If true, the Fed’s future It must rethink how it formulates its monetary policy.

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The future direction of the Fed

Predicting the Fed’s monetary policy course is more difficult than it has been in the past few months given the current uncertainty, and the Fed’s stance is still unknown as both unemployment and inflation have missed their targets. For now, the Fed still appears to be focusing on falling unemployment and believes the problem is only temporary. If so, additional rate hikes could help stabilize the medium-term outlook, with the Fed likely to raise rates several more times in the future. Under AllianceBernstein’s base case, the Fed will raise interest rates one more time this year and begin shrinking its balance sheet at the same time. But AllianceBernstein will have to adjust its view if inflation has not started to pick up in the coming months.

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